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In 2018, Ethereum developers first used the term “decentralized finance” (DeFi) to describe the new wave of financial applications built on Ethereum. Since then, the DeFi ecosystem has exploded, with hundreds of projects launching and attracting billions of dollars in value locked up in Ethereum smart contracts.
"DeFi Summer" in 2020 saw a rapid increase in the value locked in DeFi protocols, not just on the Ethereum platform but also across several other blockchains. In November of 2021, the Total Value Locked (TVL) reached almost $100 billion, which has since declined to just under $30 billion today.
While the current TVL is a fraction of what it was during the 2020 DeFi summer hype, DeFi protocols are still processing billions of dollars worth of transactions daily.
But since we are in a bear market, the best DeFi coins are the ones that have cemented their place, reliably maintaining safety features, a growing community, and regular updates.
“Decentralized Finance” encompasses the broad category of financial protocols and applications that run on Ethereum and other blockchains. It includes everything from lending and borrowing platforms to stablecoins and tokenized BTC.
DeFi crypto is more granular; it refers to the actual digital assets that power these protocols and applications. These include stablecoins, synthetic assets, and other types of tokens that are used to trade or interact with DeFi protocols.
What happens in a bear stock market also happens in a crypto winter, which is investor appetite for cash-generating assets.
The money flow shifts from riskier assets to less risky ones during a DeFi winter, so the best DeFi coins are the protocol tokens that offer stable interest-bearing yield on your cryptocurrency investments. From this perspective, the current market conditions are ripe for investing in top DeFi protocols. Another reason to invest in DeFi tokens is that they are some of the strongest cash-flowing assets in web3, providing liquidity to the decentralized exchanges and protocols that need it.
UNI is the native token of the Uniswap Protocol, the largest decentralized exchange (DEX) by trading volume. UNI holders can stake their tokens to earn a portion of the protocol's trading fees. The Uniswap Protocol interfaces with hundreds of different Ethereum tokens and allows for the easy swapping of assets.
UNI token holders can also vote on governance proposals that help determine the protocol's future, a tenet that Uniswap says makes it a "public good" more than a traditional company.
Uniswap is an automated market maker (AMM), or in layperson's terms, a collection of smart contracts that provides liquidity to its DEXs. Uniswap does not need an order book because the protocol uses a mathematical formula to automatically match buyers and sellers, making it very easy to trade on Uniswap.
MKR is the native token of the Maker Protocol, a decentralized lending platform focused on stability.
The protocol contains DAI, a stablecoin pegged to the US dollar. DAI is meant to be a decentralized alternative to traditional fiat currencies. It's algorithmically collateralized by various cryptocurrency assets and can be created or destroyed (redeemed for fiat) as needed to maintain its peg.
It works like this: when the value of DAI falls below its dollar peg, MKR is minted and sold to buy more collateral and increase the value of DAI. When the value of DAI rises above its dollar peg, MKR is burned to reduce the amount of DAI in circulation and bring its price back down.
In terms of the token, MKR holders can vote on governance proposals that determine the stability fee, which the protocol uses to ensure that Dai remains stable. MakerDAO seeks to become the backbone of a decentralized global financial system, and its protocol has been live since 2017.
Another decentralized exchange protocol, SushiSwap is a fork of the popular Uniswap protocol, created to address some of the perceived shortcomings of Uniswap like high fees, governance issues, and concerns over the degrees of its decentralization. SushiSwap allows users to trade various assets in a decentralized fashion without the need for a central authority.
The native token, SUSHI, is used for multiple purposes, including staking, governance, and fees.
What separates SushiSwap from Uniswap is a bigger focus on yield farming, which allows users to earn rewards for providing liquidity to the platform.
AAVE is the native token of the Aave Protocol, a decentralized lending platform that allows users to deposit their crypto assets and earn interest on them. AAVE token holders can also stake their tokens to earn rewards from the protocol.
Initially built on the ERC-20 token standard, Aave has expanded functionality to other blockchains like Avalance, Polygon, and Arbitrum. Aave boasts a completely open-source protocol that anyone can audit.
The protocol is also designed to be upgradable so that Aave can add new features over time without compromising the security of users' assets. Token holders do so by staking on the outcome of Aave Improvement Proposals (AIPs), which move development forward.
COMP is the native token of the Compound Protocol, another decentralized lending platform. Like Aave, Compound is built on Ethereum and allows users to deposit their assets and earn interest on them.
The two bear many similarities, with Aave inching ahead regarding rates and overall liquidity. However, Compound recently released Compound III, a massive upgrade with a new suite of features. Compound redesigned the risk management system, added new markets, and improved the user interface.
Furthermore, Compound uses Chainlink exclusively on its price feed oracles, which determine the interest rates on its loans. As Chainlink is the leading oracle provider in DeFi, this gives Compound an edge in terms of reliability.
DOT is the native token of the Polkadot Protocol, a next-generation blockchain protocol.
Polkadot is unique in that it allows for interoperability between different blockchains. This means that different blockchain networks can communicate and share data with each other easily, opening up a world of possibilities for DeFi applications. DOT holders can stake their tokens to earn rewards from the protocol in exchange for providing security.
The Polkadot Protocol is also designed to be scalable, meaning that it can handle a large number of transactions without compromising on speed or security. In terms of governance, DOT holders can vote on proposals that determine the direction of the protocol's development.
ENS is a decentralized DNS service that allows users to map human-readable names to Ethereum addresses. This makes it easier for people to send and receive ETH and other assets on the Ethereum blockchain.
ENS also allows for the creation of subdomains, which can be used to create more user-friendly wallet addresses or link different applications together.
For example, you could create a subdomain for your decentralized exchange that points to your wallet address. ENS is integrated into several popular Ethereum wallets and applications, making it one of the most user-friendly DeFi protocols.
A derivatives liquidity protocol, Synthetix Network is an Ethereum-based project that allows users to trade various synthetic assets. These assets are digital representations of real-world assets, like commodities, fiat currencies, and even other cryptocurrencies.
The use of synthetic assets allows Synthetix to avoid the need for custody of the underlying asset, which significantly reduces the risk of theft, loss, or the need for physical settlement.
In addition, synthetic assets (also called "synths") allow for zero slippage, meaning that users can buy or sell an asset without worrying about the price changing.
Unlike some other DeFi platforms, Synthetix is governed through a hybrid combination of community members, developers, elected officials, and council members, ensuring that the platform is community-driven and responsive to users' needs.
Synthetix uses SNX tokens for a variety of purposes, including staking (which gives users access to trade synthetic assets), governance (allowing users to vote on platform proposals), and fees (used to pay for the creation and destruction of synthetic assets).
LookRev is a peer-to-peer marketplace platform that allows users to tokenize the ownership of product lines and share in the profits through LOOK, the platform's native token. LookRev uses blockchain technology to track the ownership of products and ensure that the correct people receive the proceeds from each sale.
LookRev's product suite includes a variety of products and services that allow users to create, buy, and sell products. The platform also offers a service dashboard that helps users keep track of their sales and activity on the LookRev network. With a growing userbase and billions of shopper views, the LOOK token is an essential part of the LookRev ecosystem.
One of Ethereum's most exciting scaling solutions, Loopring is a protocol that allows for the decentralized exchange of assets. Loopring achieves this by using a unique system called ZK-rollups, which allows for the execution of trades off-chain while still maintaining the security of on-chain data.
ZK-rollups, or zero-knowledge rollups, are a type of cryptographic proof that verifies data without revealing it, allowing the platform to bundle many trades into a single on-chain transaction. This reduces the amount of data that needs to be stored on-chain, significantly increasing the scalability and speed while lowering transaction costs.
Loopring is known as a Layer 2 protocol, meaning it sits on top of Ethereum and complements its existing functionality. Loopring helps Ethereum scale by taking some of the load off of its main blockchain, processing transactions off-chain while maintaining the same security level.
Loopring uses LRC tokens for a variety of purposes, including fees (used to pay for protocol operations), liquidity (used to provide liquidity to the order book), and governance (allowing users to vote on platform proposals).
Launched in 2020 by esteemed developer Andre Cronje, Yearn Finance seeks to maximize yield for users by automatically investing their deposited funds into the highest-yielding protocols.
Yearn Finance currently offers a suite of products, including vaults and automated investment portfolios that provide risk-adjusted returns; yield farming, which allows users to earn rewards for providing liquidity to DeFi protocols; and insurance, which protects users against losses incurred due to platform bugs or attacks.
Yearn Finance is community-driven and decentralized, with no single owner or controlling entity — this is unique because it’s not a platform or protocol, but a collection of protocols that work together to maximize user yield.
Protocols like Compound, Maker, and Curve are integrated into Yearn Finance to provide users with the best possible returns.
Balancer is another AMM that allows users to trade various assets. Balancer says it "turns the concept of an index fund on its head," allowing users to create custom portfolio weightings for the assets they want to trade.
This is done through a process called "smart pooling," which uses smart contracts to rebalance a portfolio as the underlying asset prices change automatically. Smart pooling enables greater customization and flexibility than traditional index funds, which are limited by their static weightings.
Like most other DeFi protocols, the BAL token is used for various purposes, including governance, fees, and staking.
The best way to start investing in these high yield DeFi protocols is by buying the native tokens of the platforms directly.
For example, if you want to invest in Maker, you would buy the MKR token. If you want to invest in Compound, you would buy the COMP token. You can buy these tokens directly on a variety of exchanges, but choosing the right tokens can be difficult, as there are hundreds of different DeFi protocols out there.
Many DeFi protocols boast mouth-watering yields, sometimes upwards of hundreds of percent per year.
While these returns may be possible in the short term, it's important to remember that they are not sustainable in the long term. Generally, the more risk involved, the higher the potential return.
When yields seem too good to be true, they often are. Safety in DeFi remains a significant concern, and users should always beware of platform risks before depositing their funds.
Furthermore, DeFi can be confusing — learning how to use all the different protocols and platforms can be daunting, even for experienced crypto users. One wrong move can lead to loss of funds, and there is often no customer support to help you if you make a mistake.
Using Ember Fund may be a good option for those who want to get involved in DeFi while mitigating some of the risk. Ember Fund is a mobile app that allows users to easily invest in a curated portfolio of cryptocurrencies. The app has a DeFi Index portfolio of 15 coins hand-selected by Ember Fund's crypto veterans. The portfolio is rebalanced periodically, and users can track their investments 24/7.
Ember Fund is a good option for those who don't want to carry the burden of navigating DeFi portfolios themselves. Furthermore, Ember Fund's DeFi Index includes a variety of DeFi coins previously listed, so you can be sure that your investment is diversified.
Whether you're a DeFi pro or just getting started, download Ember Fund and try it today.
Looking to learn more about crypto? Explore the Ember Fund blog here.
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